The Secret History of the Credit Card (full documentary) | FRONTLINE
FRONTLINE PBS | Official・2 minutes read
Credit cards are a crucial part of American life, with the industry thriving on high interest rates and fees, targeting customers who carry balances. The industry's profitability is maintained through tactics like offering zero percent interest deals and imposing penalty fees, despite concerns about fairness and consumer protection laws being blocked.
Insights
- South Dakota's deregulation of interest rates and the Marquette decision allowing higher rates across states made the state a hub for credit card companies, significantly impacting the industry's growth and profitability.
- The credit card industry's reliance on high-interest rates and fees, targeting revolving customers who carry balances, along with strategies like reducing minimum payments and complex contracts, raises concerns about consumer financial burden and industry practices, fueling debates on potential regulatory reforms to protect consumers.
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Recent questions
How do credit card companies profit?
By charging high interest rates to revolving customers.
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Summary
00:00
Credit card industry profits from high interest
- Credit cards have become a significant part of American life, with the industry earning record profits.
- South Dakota played a crucial role in the credit card industry's growth due to deregulation of interest rates.
- Citibank moved its credit card division to South Dakota to take advantage of the state's favorable laws.
- The Marquette decision allowed banks to charge higher interest rates across states, leading to South Dakota and Delaware becoming credit card hubs.
- The credit card industry's profitability is attributed to the high interest rates charged, especially to revolving customers.
- The industry prefers customers who carry balances and pay interest, known as revolvers, over those who pay off their bills monthly.
- The average American family carries around $8,000 in credit card debt, with high-interest rates reaching up to 30%.
- Families like the Muellers can spiral into debt due to job loss, medical issues, or family breakdown, leading to bankruptcy.
- Credit card companies apply penalty interest rates and fees when customers fall behind on payments, exacerbating debt.
- Despite facing bankruptcy, families like the Muellers continue to receive credit card offers, perpetuating the cycle of debt.
16:43
Credit card industry profits from debt.
- Credit card company sent a solicitation offering zero percent interest for life with up to a $50,000 line of credit, along with a $25 offer for diapers, milk, and laundry detergent.
- Encouraging Americans to take on credit card debt is crucial for the industry's profitability.
- Andrew Carr, a financial innovator, suggested reducing the minimum payment on credit card balances from 5% to 2%, leading to higher borrowing.
- Carr's idea of a 2% minimum payment is now common on millions of credit card bills, with 35 million Americans paying only the minimum each month.
- Making the minimum payment eases consumers' anxiety about credit card debt, as they feel financially prudent.
- Carr convinced clients to offer zero percent introductory rates, attracting customers despite potential changes in rates.
- Credit card marketing relies on data from credit reporting agencies to target consumers effectively.
- Fair Isaac calculates FICO scores for almost every American with a credit history, with a median score of 720 out of 850.
- Credit card contracts are often complex and difficult to understand, allowing issuers to change terms and conditions without much notice.
- The Supreme Court decision in Smiley v. Citibank in 1996 allowed credit card banks to charge higher fees, leading to increased profits and customer complaints.
32:54
Credit card fees soar, regulation questioned
- Smiley Credit Card Company increased fees from 5 to 10 to 15 to 29, now possibly reaching 50 annually.
- Concerns arise about the fairness of fees, including a 25% interest rate and additional charges.
- Credit card companies have doubled revenue from fees like late fees, over-limit fees, and return check fees.
- Fees have transitioned from penalties to profit streams, with rates now three to four times higher than a decade ago.
- Interest rates can double overnight, with the ability to change rates with 15 days' notice.
- Banks are adjusting interest rates, raising fees, and altering due dates to maximize profits.
- The Office of the Comptroller of the Currency (OCC) regulates national banks like Chase, Citibank, and MBNA.
- OCC's involvement in the Providian case led to a $300 million settlement, addressing consumer protection.
- OCC declared itself the exclusive regulator of national banks, limiting state consumer protection laws.
- Efforts to reform credit card practices, including disclosing minimum payment impacts, face industry resistance and political challenges.
50:10
Credit card companies face consumer protection debate.
- Consumer protection legislation has been blocked, including measures such as minimum monthly payment legislation, interest rate caps, and a ban on marketing to college students, with the aim to prevent unfavorable practices by credit card companies that harm consumers.
- Concerns are raised about the increasing financial burden on consumers due to credit card companies changing interest rates, adding fees and penalties, and altering contract terms, leading to a potential tipping point where such practices may no longer be tolerated, prompting a debate within the industry on the negative impact of high interest rates and fees.
